How to Calculate Debt Service Ratio
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What is Debt Service Coverage Ratio and Why Should I Care?

One important thing to know is the debt service coverage ratio is only one part of determining whether a businessperson like you can take on a loan. However, these ratios still tell a lot about your future financial value.

Known as Debt Service Coverage Ratio, it’s sometimes named GDS for Gross Debt Service Coverage Ratio, and TDS for Total Debt Service Coverage Ratio. Debt Service Coverage Ratio is a preliminary assessment to determine whether borrowers like you are already in debt. As lenders, one of the major steps in making sure someone obtaining a loan isn’t a risk is to use a specific ratio for better business loan evaluations.

If you fall below a particular percentage, you’ll have full consideration as a no-risk borrower.

The Basic Calculation for Gross Debt Service Ratio

It’s important to learn how to properly calculate GDS and TDS to obtain a percentage as a general benchmark. To determine GDS, you simply have to add what you pay in mortgage costs with your property taxes. Take this figure and divide it by your gross family income. This gives you a percentage showing your current debt issues.

Favorably, this number should fall below 30% to prove you’re not overwhelmed with debts. Even just a few percentage points above this can mean you have far too many unacceptable expenses at the moment to safely borrow.

For instance, if you have to pay over $12,000 a year in mortgages and several thousand dollars per year in property taxes, you’ll need to have an income falling above $50,000 or more to avoid going into debt. Lower income is already a red flag for a business loan.

Even so, lenders use the GDS as just a framework on whether it’s appropriate to lend to people like you.

Perhaps your current career has income growth potential, or you can show proof your new business would provide exponential revenue soon. With these things in mind, lenders may still want to lend to you based on a favorable future income.

It’s proof other detailed criteria goes into whether a lender thinks you can safely take on a business loan.

What’s important is to stay transparent in the loan process and provide all your financial information to the lender since they’ll use GDS to screen what you can realistically borrow.

Calculating Total Debt Service Ratio

Another debt service ratio process is TDS, or totaling up other debts you have in addition to the ones in GDS. Basically, it takes your housing expenses total and adds to other personal expenses like credit card interest, car payments, or outside loan expenses.

This figure gets divided by your annual income for another percentage. On this one, you need to fall under 40% in order to properly qualify for a loan.

Again, though, the 30% on GDS and 40% on TDS are just guidelines and don’t consider you may already have good credit. If you do, your lender may still decide to lend based on the fact that you haven’t defaulted on any prior loans or credit card debt.

Using the Debt Service Coverage Ratio

Through Carmino Financial, we use the debt service ratio often to evaluate business loan applications. Doing so makes our small business lending process all the faster. You can apply for a loan through us in 10 minutes, and we’ll connect you to a business expert to see if you’re qualified.

The debt service coverage ratio is just one part of this faster process, but it helps us be able to provide loans up to $500,000 in just a few days.

Think you’re in a good place to take on a business loan? Fill out the form below to apply for one now.